QWhat's the margin for error in 2008? Sitting with a sales director poring over his 2008 business plan for Retail Customer X, I was asked "how can I help my customer to realise that we really do need to increase our prices if we are to continue to provide ongoing support and innovation?"
AThe sales director and I took a blank piece of paper and worked out how much gross cash margin the customer had made from his brands in 2007. Let's say that number was £100. I then asked him to calculate the gross cash margin he had made from that customer in 2007.
That number, in proportion, was £17. Taking a step back from the usual percentage margin discussion he had been having with the trading director, he was shocked at the difference between the two.
We then spent half an hour reviewing how those numbers had changed over the past five years. The numbers painted a picture of an increase in growth for the customer at the expense of the manufacturer. Before you jeer "that's what effective negotiation skills are all about," let's stop and think for a moment. The supplier had their raw materials cost prices increased twice in the last three months. By getting squeezed at both ends, the supplier is now really feeling the pressure.
Suppliers are starting to wake up to the fact that while the difference in who makes what margin could be debated until the cows come home, what is happening is just not sustainable. Suppliers now realise that they cannot rob Peter to pay Paul. They need cash to invest in innovation, which can come from either borrowing money or freeing up cash from their profits. I can hear you scream "look at the profits these huge food manufacturers state in their glossy annual reports". It's tomorrow and next week that I am talking about, not yesterday.
The power struggle and arm wresting will always be there and long may that continue. It's where you focus your efforts that will count in the future. Look at the size of the cake and work together to grow your cake and the supplier's share of your cake. Be selective with the supplier you want to work with in the future rather than spread your efforts too thin. Meet and get to know the key players. Entice them in, then sell them the benefits of working with you.
Looking at the numbers extrapolated to the year 2015, this supplier would be better off in terms of cash margin without that customer in his portfolio. Once or if we get to that stage, the consequences become more than just marginal for everyone.
Chris May is a partner at FXL (email: chrism@fxl.co.uk)
Has the number of customer complaints about the price of goods increased recently?
